Euro crisis poised for new, more dangerous phase

Commentary: Portugal adds to EU pattern of political instability

WASHINGTON (MarketWatch) — The euro crisis has long since gone from being a currency and debt crisis to becoming a full-fledged economic crisis, and now it is poised to become a political crisis as it destabilizes governments throughout Europe.

The flawed construction of the euro
EURUSD, +0.07%
and the bungled response to the crisis by European leaders has created a rift across the continent that is toppling political leaders and undermining the European Union itself.

As new crises arise in individual countries, they are becoming part of a pattern of political instability that carries new risks for European integration and its common currency.

Mauldin: Economists are the new shamans

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Economist John Mauldin discusses how to avoid the "theory of inflation" and why economists are more like shamans than scientists. Photo: Getty Images.

The political stalemate in Italy in the wake of February’s national election is worsening as the head of state, President Giorgio Napolitano, faces the end of his own seven-year term on May 15, limiting his options in breaking the impasse to form a government there.

In France, the scandal involving former Budget Minister Jerome Cahuzac’s secret foreign bank account and suspected tax evasion has engulfed a Socialist government weakened by its ineffectiveness in righting that country’s economy.

In Spain, the government of Prime Minister Mariano Rajoy remains under a cloud of suspected corruption while a separate corruption scandal has rocked the royal family, the country’s anchor of political stability since Franco died in 1975.

In Greece and Cyprus, new conservative governments are hanging on a thread amid waves of austerity measures and bankruptcies.

This is taking place against a backdrop of galloping unemployment, recession, and a deflationary spiral with no end in sight as Brussels officials, on the insistence of the German government in Berlin, impose austerity measures dictated by a narrow neoliberal ideology that have proven unequivocally disastrous.

All this just so Germany’s conservative chancellor Angela Merkel can win a third term in office in national elections this fall.

The political situation has been exacerbated by the complete failure of the traditional left in Europe to provide any constructive alternative to this crippling neoliberal orthodoxy.

Socialist and Social Democratic parties throughout the continent have either embraced this orthodoxy outright or offered only feeble resistance and nothing concrete in its place.

Reuters

French President Francois Hollande hasn’t proposed a credible alternative to the neoliberal ideology that has a stranglehold over Europe.

The biggest disappointment has been French President François Hollande, the Socialist leader whose first year in office has been so ineffective that his unfavorability rating has soared to 70%, even before the Cahuzac scandal has fully registered in the polls.

The collapse of the traditional left has led to the rise of protest and extremist parties in successive elections. In Greece, the far-left Syriza party came from nowhere to win 27% of the vote in last summer’s elections and is only awaiting the collapse of the current grand coalition to become the dominant party in new elections.

In Italy, Beppe Grillo’s Five Star Movement also captured a fourth of the vote, enough to block the formation of any government headed by the traditional parties.

On the far right, the Golden Dawn party in Greece is gaining support and the National Front of Marine Le Pen is enjoying a resurgence in France.

Lulled by nearly seven decades of peace and stability in Europe, it might be easy to overlook the deeper risks of this growing instability. Despite the real successes of the EU in promoting prosperity, however, European history as recently as Bosnia and Kosovo leaves no doubt that breakdown and conflict can recur at any time.

Worst of all, Europe seems set on a trajectory with little hope of changing course. With less than six months to go before national elections, Merkel and her Cabinet are chained to their inflexible stance on bailouts or stimulus.

The opposition Social Democrats in Germany are saddled with a leadership that is decidedly mediocre and has proven itself inept at gaining any traction against Merkel.

They seem at times to be leaving the door open to a renewed grand coalition if Merkel’s Free Democrat coalition partners fail to reach the 5% hurdle for parliamentary representation.

Even if by some fluke a Social Democratic-Green coalition comes out with a majority, there is no sign that German public opinion would allow any government to radically change course on Europe.

The only chance would have been for Merkel to have adopted a grander vision after her 2009 victory and to have led voters to a broader understanding of European solidarity. But that scenario can now be consigned to the great what-ifs of history.

Instead, as recession and political instability grow in Europe, the question we are left with is what next?

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